Gibson v.s. Tesla Motors

So another privately owned household name went down under the burden of debt. According to Bloomberg, famed guitar maker Gibson filed for bankruptcy:

The restructuring will allow the instrument business to “unburden” itself of a consumer-electronics unit that Gibson blamed for its financial woes. Gibson owes as much as $500 million, and lenders will provide a new loan of up to $135 million to keep the company in business, according to court papers.

With people's memory about the PE-backed Toys R' Us going bankrupt still fresh, I could already imagine the outcry from some enthusiastic news readers or college finance professors who have never worked in the market before, drawing comparison with Tesla Motors, which has been under a lot of negative press regarding its cash burn and debt ratio.

One thing to keep in mind is that "market sentiment" is more important than "financial theories", at least in the short term. The fact that Tesla's market cap (the total value of its equity) did not go to zero upon the tons of negative coverages yelling that it's going down, it signals that the market believes that Tesla is going to get refinanced for those due debts and its stocks are still worth something. In fact, as of today Tesla's stocks are still worth some $50B:

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This means that Tesla could still issue more shares or more bonds to roll over the bonds that are due soon. The market will ask for a discount but that'd be it. 

This is totally different from privately-owned corporates, whether by PE firms (Toys R' Us) or by individuals (Gibson), which have not had its stocks transacted by large volumes for quite a while therefore do not have any sort of signals for the worth of their stocks. This makes financing options purely based on company's financial health, specifically near-to-mid term free cash flow levels.

While everybody knows that the businesses of Tesla and Gibson are very different, it's also important to recognize that the market perceptions are also very different. While Toys R' Us and Gibson are in clear trouble and might just disappear de facto, I would bet that Tesla will get refinancing easily and carry on its (high-growth) life as usual.

 

Free Cash Flow (FCF)

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